Why the Rules of the Financial System Are Insane and Need to Be Re-written

Graydon Carter interviews Michael Lewis at an event co-sponsored by Bloomberg and the magazine. From PatrickMcMullan.com.

Vanity Fair contributing editor Michael Lewis sat onstage last night at the Museum of Modern Art, in New York City, and discussed, as moderator and V.F. editor Graydon Carter put it, “what the hell happened to the financial markets during the periods from 2007 to 2008.” Among those who turned up to hear Lewis and Carter’s hour-long conversation were writers Tom Wolfe and Gay Talese, New York City police commissioner Ray Kelly, and Time Inc.’s John Huey. Topics covered included Goldman Sachs’s role in the financial collapse, whistle-blowers who tried to go to the S.E.C. but were ignored, and what Lewis would do if he were God and could revamp the country’s financial system.

The cause for the event was the publication of Lewis’s most recent book, The Big Short: Inside the Doomsday Machine, which tells the remarkable tale of the subprime-mortgage crisis through the accounts of financial insiders, one of whom—Steve Eisman—was sitting in the audience. (The book was excerpted in Vanity Fair's April 2010 issue.) “I was walking into a story that was very heavy, and in explaining the financial crisis, I was going to have readers wading through stuff that they wouldn’t really understand,” Lewis said. “There were a handful of people who had foreseen the crisis coming. It was a very small universe. They didn’t know each other. I tried to meet every one of them Then I picked people from this universe who could tell the story.”

When asked how outraged lawmakers in Washington are over the financial crisis, Lewis answered with an anecdote about being invited to talk to the House Republican Book Club at the Capitol. He said he expected only eight or nine people to show up, but 40 or 50 House Republicans and their staffers appeared for the event.

“I said to read this little article I wrote for Portfolio magazine—which was the start of this book [The Big Short]—and they read it,” Lewis said. “A few people came up and they said, ‘We wanted to come see you because we really like The Blind Side and Money Ball, but we can’t hang around for this stuff because we have a hearing we have to go to, and we just don’t want you to be offended if we get up and leave three minutes into this.’ I was supposed to be there for an hour. I was there for almost three. And nobody left. And their questions were increasingly: ‘Oh my god, Goldman Sachs did what? A.I.G. did what?’ They didn’t understand it. And the more they understood it, there was smoke coming out of their ears they were so angry. I thought they were going to go kill someone when they left the room! And at the end of this, the guy who said he had been planning to leave, but hadn’t, came up and said, ‘We were going to leave, but it was the Bernanke hearing,’ and they said, ‘We never learn anything from him! They never explain it to us!’ The minute they started to understand, they were outraged. And I think the more things are explained, the more outraged people will get.”

What should happen as a result of this outrage? Lewis doesn’t think the solution is to just throw Wall Street villians behind bars.

“It’s not hard to find people to lynch,” Lewis said. “They will no doubt emerge—be put in handcuffs and thrown in jail. The danger is always that society decides that’s the end of the problem: we found the bad people and we put them away. When the real problem, which we have not grappled with, is that the structure of our financial system—the rules of the road—have been insane for 25 years and they need to be re-written, and people need to be incentivized differently.”